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Taxes on Benefits

 
FAQ
Q: I received my tax form and this is not the amount I have been paid. 

A: Your Form 1099-R tax form lists the "Gross Distribution."  This is the amount before any deductions are taken from your check.  You may be comparing this figure to the "Net" amount that you actually received.

 
Q: Why did I receive more than one Form 1099-R?

You may have received more than one Form 1099-R because the Internal Revenue Service (IRS) requires separate forms for each type of payment (distribution code).  For example, during the same tax year, you received a monthly benefit and a partial lump-sum payment requiring the use of two different distribution codes. Separate distribution codes require separate 1099-Rs.  Below are applicable IRS distribution codes used for the 2006 Tax Year:

Code

1     Early (premature) distribution, no known exception.  (You are required to file IRS Form 5329, Additional Taxes on Qualified Plans and Other Tax-Favored Accounts.)
2     Early (premature) distribution, exception applies.  (You are not required to file IRS Form 5329.)
4     Death.  (You are not required to file IRS Form 5329.)
7     Normal distribution.  (You are not required to file IRS Form 5329.) 
A     May be eligible to elect to use IRS Form 4972. 
G     Direct rollover.  (You are not required to file IRS Form 5329.)

Disclaimer & General Plan Information

The information contained on this page is intended only for general guidance and does not cover every relevant tax law.  PSERS must conform to the Internal Revenue Code and other federal and Pennsylvania statutes.  The provisions of the Internal Revenue Code or other applicable statutes supersede the information contained on this page.  The disavowals of liabilities contained on this page applies to any and all information or advice you may receive from PSERS.

PSERS cannot provide individual tax advice.  It is important to convey to the Internal Revenue Service (IRS) or any tax professional that PSERS is a qualified trust under Section 401(a) of the Internal Revenue Code and is a mandatory, governmental defined benefit plan.

For detailed information about the federal taxation of your PSERS retirement benefit, we suggest you obtain IRS Publication 575, Pension and Annuity Income (including Simplified General Rule).  If you retired prior to November 19, 1996, you should reference IRS Publication 939, General Rule for Pensions and Annuities (Nonsimplified Method), for tax regulations specific to your date of retirement.  These IRS publications are available from the IRS by calling 1-800-829-3676, or through the IRS web site.


Taxation of Your Benefit

Your PSERS monthly benefit is subject to federal taxes.  Monthly benefit payments from PSERS are exempt from Pennsylvania state and local taxes. If you reside in another state, you must check with your state and local authorities to determine the taxability of the PSERS payments made to you.  If the state where you reside taxes your PSERS benefit, you must pay your taxes directly to your taxing authority.  PSERS cannot withhold state or local taxes from your monthly benefit payment.

The Form 1099-R

The Form 1099-R is to be used by you for the preparation of your annual federal income tax return.  The form shows a breakdown of the money you received from PSERS during the previous calendar year, as well as the federal income tax withheld, the Investment in Contract recovered during the year (if applicable), and appropriate distribution code.

Mailing of the 1099-R

PSERS automatically sends the 1099-R to you the end of each January.  If you do not receive your copy by February 10, you should contact PSERS for a duplicate copy, or you can obtain a copy through Interaction.

If your monthly benefit is sent via direct deposit or electronic transfer, please remember to keep your home address and name current with PSERS for the mailing of your 1099-R.  Not having your address up-to-date will not only delay receipt of your 1099-R, but it may also temporarily suspend receipt of your monthly benefit payment.


Different Total on 1099-R than What You Received

Your 1099-R tax form lists the "Gross Distribution."  This is the amount before any deductions are taken from your payment(s).  You may be comparing the gross amount figure to the "net" amount.  The net amount is the amount you actually received after all deductions were taken and, if you are receiving premium assistance payments, before the premium assistance amount was added.

Receipt of Multiple 1099-R Forms

You may receive more than one 1099-R for the tax year depending on your benefit selection.  The IRS requires that PSERS report different types of retirement payments on separate 1099-R forms, as the payments require different distribution codes.  If you recently retired and had PSERS roll over taxable contributions and interest for you, you should receive at least two (2) forms for the tax year in which the rollover occurred.

Changing Your Federal Withholding Amount

You may change your federal withholding rate at anytime.  To change your federal withholding rate, you must complete, sign, and submit a W-4P form to PSERS. You may obtain a W-4P by printing a copy directly from the PSERS website by clicking here (PDF) , through the IRS website by clicking here, or by contacting PSERS or the IRS.

PSERS offers an online Monthly Federal Tax Withholding Calculator to assist you with the completion of the W4-P form.  Click here to access the calculator. Use of the calculator does not replace having to complete and submit the W-4P form (PDF). 

PSERS must receive your completed W-4P in the month prior to the month in which the change is to take effect.  For example, if you want the change to effect your April payment (which is paid the last business day in April), we need to receive the W-4P in March.

You will receive written confirmation of the change in the week prior to the receipt of the monthly payment first affected by your request.


Tips for Completing the W-4P

When you submit the W-4P to PSERS, the withholding selection on the new form supersedes any previous tax withholding request you made.  Please keep this in mind, especially if you are requesting the withholding of an additional dollar amount.

Example: You had previously elected "Married with zero (0) exemptions (allowances)," which on its own, withheld $125.  You requested an additional amount of $25 be withheld in addition to the $125, for a total of $150 per month federal withholding. Later, you decide you need an additional $50 withheld per month in addition to the $150 total amount already being withheld.  You want your total withholding to now become $200. When you complete the new Form W-4P, you must complete it as though you had never previously asked for an additional amount.  You would complete the form with "Married with 0 allowances" ($125) plus an additional withholding of $75 for a total of $200.


Under Age 55 and Receiving a Retirement Benefit

If you were under age 55 in the year that you terminated service, and you choose to receive any partial lump sum payment(s) before you reached age 59 ½, the IRS imposes a 10% Tax on Early Distributions.  The Tax on Early Distributions is on the taxable portion of any partial lump sum payment(s).  If you are at least age 55 in the year you terminate service, the Tax on Early Distributions does not apply to you.  

You are not subject to the Tax on Early Distributions if:

    • you rolled any partial lump sum payment(s) into an eligible retirement plan and did not withdraw it from the plan until you reached age 59 1/2, or
    • you retired and chose to receive an amount not to exceed your Pre-87 Investment in Contract in a single partial lump sum payment with your first check, or
    • you elected to withdraw your contributions and interest and postponed the payment until you reached age 59 1/2.  

Please Note!!!  PSERS does not deduct the Tax on Early Distributions for your partial lump sum payment.  You are responsible for paying the 10% Tax on Early Distributions directly to the IRS (see IRS Form 5329 (PDF)).


Exclusion Ratio (Recovered Investment in Contract)  

If you had paid out-of-pocket for a purchase service credit, your 1099-R may show a different amount under the Gross Distribution than what is listed under the Taxable Amount.  You will also see a dollar amount listed under Recovered This Year.  Because your purchase was paid for with previously taxed funds, those funds used to purchase the service credit cannot be taxed a second time.  A tax “exclusion ratio” is applied to the amount of money you spent to purchase the service credit.  This exclusion ratio spreads the amount paid for the purchase(s) over your projected lifetime, resulting in a certain portion of your monthly benefit being tax exempt.   

Additional Tax Information

Additional tax information is available in the PSERS pamphlet, Let’s Talk About Taxes on Your Retirement Benefits.  However, we encourage you to seek advice from your tax consultant or the Internal Revenue Service.